At FM Global Invest, we believe that sound investment decisions require a structured and transparent framework. That’s why we developed the FM Global Invest Risk-Reward Rating — a proprietary scoring system designed to identify investment opportunities with attractive risk-reward profiles.

While originally designed for individual companies, we have adapted the framework to evaluate Exchange-Traded Funds (ETFs).

In this article, we explain how our methodology evaluates ETFs and how it supports intelligent, risk-conscious portfolio construction.

Why ETFs Require a Tailored Evaluation Approach

ETFs differ meaningfully from individual companies. They vary by structure and strategy, and introduce unique risks. As such, we have created a modified scoring system for ETFs that focuses on characteristics such as:

• Structural strength and diversification
• Cost efficiency
• Return expectations based on underlying holdings
• Risk mitigation characteristics
• Dividend sustainability

Investor Benefits of the FM Global Invest Risk-Reward Rating for ETFs

The FM Global Invest Risk-Reward Rating functions as a filtering system, identifying ETFs that are most attractive in terms of risk and reward.

As the score increases, the number of qualifying ETFs decreases — highlighting the selective nature of our system in identifying top-tier investment opportunities with especially attractive risk-reward profiles.

Score	Risk-Reward Evaluation	Rating	Recommended Action
0%–19%	Very Unattractive in terms of risk and reward	Strong Sell	Exit the position entirely.
20%–39%	Unattractive in terms of risk and reward	Sell	Reduce your allocation.
40%–59%	Moderately attractive in terms of risk and reward	Hold	Maintain your current position.
60%–79%	Attractive in terms of risk and reward	Buy	Consider increasing your position.
80%–100%	Very attractive in terms of risk and reward	Strong Buy	Accumulate shares and overweight the position within your portfolio.

Note: These recommendations are general guidelines based on the FM Global Invest Risk-Reward Rating and are intended to support diversified, risk-conscious portfolio construction. Final allocation decisions should reflect your personal investment goals, risk tolerance, and broader portfolio strategy.

What Does the FM Global Invest Risk-Reward Rating for ETFs Measure?

Each ETF is evaluated across 10 categories, with 32 subcategories in total. Each subcategory receives a score from 0 to 5, and category weightings reflect our emphasis on factors that most influence long-term investor outcomes.

Key Categories of the FM Global Invest Risk-Reward Rating for ETFs

Category	Description
ETF Strategy & Diversification Structure	Evaluates clarity of investment strategy, holdings diversification, sector and geographic exposure, and concentration in the top 10 holdings. This category is crucial because it reveals the ETF’s ability to provide broad, balanced exposure and reduce overreliance on a few sectors, regions, or companies.
Downside Risk Protection	Assesses resilience during recessions and inflationary periods. High scores are awarded to ETFs that include companies with stable cash flows and significant competitive advantages. This is important as it measures how well an ETF might perform in adverse economic conditions, helping to protect investor capital during market downturns.
Financial Health of Top 10 Holdings	Measures metrics such as the average EBIT Margin and Return on Equity (ROE) in addition to the average Free Cash Flow Yield of the ETF’s 10 largest positions. Financially healthy top holdings increase the likelihood of consistent returns and long-term stability.
Dividend Sustainability	Evaluates historical dividend growth, payout safety, and reliability of the ETF’s income stream. This ensures that income-focused investors are not just chasing yield, but investing in ETFs with stable and sustainable dividend sources.
Cost Efficiency	Focuses on the ETF’s Expense Ratio. Lower Expense Ratios contribute significantly to long-term returns. Cost efficiency plays a major role in compounding over time — a lower fee structure directly enhances investor net returns.
Risk Profile & Volatility	Assesses metrics such as Tracking Error, Standard Deviation, and Annualized Volatility to capture volatility and predictability. A well-balanced risk profile is essential for portfolio stability and helps investors match their ETF choices to their risk tolerance.
Valuation	Analyzes metrics like the average Price/Earnings Ratio of the ETF compared to the average Price/Earnings Ratio of the S&P 500. Valuation provides insight into whether the ETF is priced attractively relative to the broader market, which can affect future returns.
Innovation	Examines whether top holdings are aligned with long-term trends and whether they benefit from structural tailwinds. Innovative holdings may position the ETF to capitalize on future growth themes, enhancing long-term performance potential.
Performance	Considers the ETF’s 5- and 10-year Total Returns. Historical performance helps assess consistency and execution, though it is not relied on alone in our forward-looking approach.
Expected Return	Combines current Dividend Yield with estimated Earnings Growth of the ETF’s top 10 holdings to calculate forward-looking return potential. This forward-looking estimate helps investors gauge the ETF’s income and appreciation potential over time.

How the FM Global Invest Risk-Reward Rating for ETFs Helps Investors

The FM Global Invest Risk-Reward Rating for ETFs:

• Filters top-tier ETFs based on a multidimensional risk-reward framework.
• Supports portfolio construction aligned with your income, growth, and volatility preferences.
• Provides transparency in how ETFs compare across key strategic dimensions.

Conclusion

Evaluating ETFs requires more than just looking at past performance or dividend yield. The FM Global Invest Risk-Reward Rating offers a comprehensive, forward-looking approach to assessing ETF quality, income reliability, and risk-adjusted return potential.

By focusing on what matters most for long-term investors, our system empowers more intelligent ETF selection and optimized portfolio construction.

With clarity, consistency, and a rigorous foundation, our ETF rating system helps investors make confident, long-term portfolio decisions in an increasingly complex market.

How to Apply the FM Global Invest Risk-Reward Rating to the Schwab U.S. Dividend Equity ETF

Here you can find a practical example showing how the Schwab U.S. Dividend Equity ETF is evaluated using the FM Global Invest Risk-Reward Rating for ETFs.

The Rating of Individual Companies based on the FM Global Invest Risk-Reward Rating

Discover how we apply the FM Global Invest Risk-Reward Rating to evaluate individual companies:

• Explore the full rating of Allianz based on the FM Global Invest Risk-Reward Rating.
• Read how we rate LVMH based on the FM Global Invest Risk-Reward Rating.
• Discover PepsiCo’s rating according to the FM Global Invest Risk-Reward Rating.

How the FM Global Invest Risk-Reward Rating Evaluates Individual Companies – The Methodology Behind Our Rating System

Read the full methodology behind how the FM Global Invest Risk-Reward Rating evaluates individual companies.

How we use the FM Global Invest Risk-Reward Rating to construct Globally Diversified Dividend Portfolios with attractive Risk-Reward Profiles

Explore how we construct The Dividend Income Accelerator Portfolio, a globally diversified dividend portfolio that combines income and dividend growth while allowing investors to strive for strong-risk-adjusted returns.